CFA 2019 level 1 schwesernotes book quiz bank SS 09 answers

References Question From: Session 9 > Reading 33 > LOS d Related Material: Key Concepts by LOS Which of the following actions is least likely to increase earnings for the current period?

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Question #1 of 51 Question ID: 500867

be concentrated in specific industries

be those that have significantly underperformed the market

have unsustainable dividend payments

Explanation

A screen for firms with high dividend yields and high book-to-market ratios would likely result in an inordinate proportion offinancial services companies and add a significant element of industry (sector) risk Uncertainty about sustainability of dividendpayments and recent market underperformance are typical characteristics of value stocks in general and not a drawback to usingthis screen to identify them

References

Question From: Session 9 > Reading 33 > LOS d

Related Material:

Key Concepts by LOS

A significant increase in days payables above historical levels is most likely associated with:

an increase in net working capital

an unsustainable increase in reported earnings

low quality of the cash flow statement

Explanation

A significant increase in days payables may indicate that payables have been "stretched" (not paid or paid more slowly), whichincreases operating cash flow in an unsustainable manner and calls the quality of the reported cash flow values into question.Stretching payables does not affect earnings because the related expenses were recognized in the period incurred An increase

in days payables will decrease net working capital, other things equal

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Key Concepts by LOS

An analyst screening potential equity investments to identify value stocks is most likely to exclude companies with:

high dividend payout ratios

low earnings growth rates

high price-to-earnings ratios

Explanation

Value stocks are considered to be those that have low prices relative to earnings (or relative to sales, cash flow, or book value).Screens that exclude firms with low earnings growth rates or high dividend payout ratios are more likely to be used to identifygrowth stocks

References

Related Material:

Key Concepts by LOS

Which of the following actions is least likely to increase earnings for the current period?

Decreasing the salvage value of depreciable assets

Selling more inventory than is purchased or produced

Recognizing revenue before fulfilling the terms of a sale

Explanation

Decreasing the salvage value will result in higher depreciation expense and lower earnings in the current period Recognizingrevenue before fulfilling all terms of a sale is an aggressive revenue recognition method that will increase earnings in the currentperiod For firms that use LIFO inventory accounting and in an increasing price environment, selling more inventory than ispurchased or produced will increase earnings unsustainably in the current period

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References

Question From: Session 9 > Reading 32 > LOS i

Related Material:

Key Concepts by LOS

Comet Corporation is a capital intensive, growing firm Comet operates in an inflationary environment and its inventory quantitiesare stable Which of the following accounting methods will cause Comet to report a lower price-to-book ratio, all else equal?

Inventory method Depreciation method

Last-in, First-out Accelerated

First-in, First-out Straight-line

First-in, First-out Accelerated

Explanation

FIFO results in higher assets and higher equity in an inflationary environment as compared to LIFO Equity is higher becauseCOGS is lower (and inventory higher) under FIFO Straight-line depreciation will result in greater assets and equity compared toaccelerated depreciation for a stable or growing firm Equity is greater because depreciation expense is less with straight-linedepreciation Greater equity will result in greater book value per common share, the denominator of the price-to-book ratio.Greater book value per share will result in a lower price-to-book ratio

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Joe Carter, CFA, believes Triangle Equipment, a maker of large, specialized industrial equipment, has overstated the salvagevalue of its equipment This would:

Key Concepts by LOS

The price to tangible book value ratio subtracts what components from equity?

Goodwill and intangible assets

Intangible assets and property, plant and equipment

Goodwill and property, plant and equipment

Explanation

Price to tangible book value is calculated by removing goodwill and intangible assets from equity This adjustment reduces assetsand equity and produces a ratio that is not affected by differences in intangible asset values that may result from how the assetswere acquired

References

Question From: Session 9 > Reading 33 > LOS e

Related Material:

Key Concepts by LOS

Which of the following is least likely one of the combinations of the quality of financial reporting and quality of reported earningsalong the spectrum of financial report quality?

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Reporting is not compliant with GAAP, although reported earnings are sustainable and adequate.

Reporting is compliant with GAAP, but the amount of earnings is actively managed to smooth

Key Concepts by LOS

Selected financial information gathered from Alpha Company and Omega Corporation follows:

Alpha Omega

Earnings before interest, taxes,

depreciation, and amortization

Which of the following statements is most accurate?

Alpha has a higher operating profit margin than Omega

Omega has lower interest coverage than Alpha

Omega uses its fixed assets more efficiently than Alpha

Explanation

Using the EBITDA coverage ratio (EBITDA / Interest expense), Omega's EBITDA coverage is 1.4 ($79,300 EBITDA / $58,100interest expense) and Alpha's EBITDA coverage is 1.6 ($69,400 EBITDA / $44,000 interest expense) Using EBITDA to measureoperating profit, Alpha has a lower operating profit margin than Omega Alpha's EBITDA margin is 4.2% ($69,400 EBITDA /

$1,650,000 revenue) and Omega's EBITDA margin is 5.5% ($79,300 EBITDA / $1,452,000 revenue) Using fixed asset turnover

to measure the efficiency of fixed assets, Omega uses its fixed assets less efficiently than Alpha Alpha's fixed asset turnover is

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5.5 ($1,650,000 revenue / $300,000 average fixed assets) and Omega's fixed asset turnover is 4.5 ($1,452,000 revenue /

$323,000 average fixed assets)

References

Question From: Session 9 > Reading 33 > LOS c

Related Material:

Key Concepts by LOS

An IFRS-reporting firm includes in its financial statements a measure that is not defined under IFRS The firm is least likelyrequired to:

define and explain the relevance of this measure

show this measure for all periods presented

reconcile this measure with the most comparable IFRS measure

Key Concepts by LOS

A spectrum for assessing financial reporting quality should consider:

quality of financial reports only

quality of earnings only

both quality of financial reports and quality of earnings

Explanation

Both quality of financial reports and quality of reported earnings are elements that should be considered in a spectrum for

assessing financial reporting quality

References

Question From: Session 9 > Reading 32 > LOS b

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Key Concepts by LOS

A mechanism to discipline financial reporting quality for securities that trade in the United States that is not typically imposed onsecurity issuers elsewhere is that:

the firm must provide a signed statement by the person responsible for preparing the financial

statements

management must attest to the effectiveness of the firm's internal controls

financial statements must be audited by an independent party

Key Concepts by LOS

Jane Epworth, CFA, is preparing pro forma financial statements for Gavin Industries, a mature U.S manufacturing firm with threedistinct geographic divisions in the Midwest, South and West Epworth prepares estimates of sales for each of Gavin's divisionsusing economists' estimates of next-period GDP growth and sums the three estimates to forecast Gavin's sales Epworth'sapproach to estimating Gavin's sales is:

inappropriate, because sales should be forecast on a firm-wide basis

References

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Key Concepts by LOS

Baetica Company reported the following selected financial statement data for the year ended December 31, 20X7:

For the year ended December 31, 20X7: $500 100%

Sales

Cost of goods sold (300) 60%

Selling and administration expenses (125) 25%

As of December 31, 20X7:

Non-cash operating working capital $100 20%

Non-cash operating working capital = Receivables + Inventory - Payables

Baetica expects that sales will increase 20% in 20X8 In addition, Baetica expects to make fixed capital expenditures of $75million in 20X8 Ignoring taxes, calculate Baetica's expected cash balance, as of December 31, 2008, assuming all of the

common-size percentages remain constant

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Key Concepts by LOS

Which of the following requirements are most likely to create incentives for management to manipulate earnings?

Key Concepts by LOS

Patch Grove Nursery uses the LIFO inventory accounting method Maria Huff, president, wants to determine the financial

statement impact of changing to the FIFO accounting method Selected company information follows:

Year-end inventory: $22,000

LIFO reserve: $4,000

Change in LIFO reserve: $1,000

LIFO cost of goods sold: $18,000

After-tax income: $2,000

Tax rate: 40%

Under FIFO, the nursery's ending inventory and after-tax profit for the year would have been:

FIFO ending inventory FIFO after-tax profit

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Key Concepts by LOS

A firm has a debt-to-equity ratio of 0.50 and debt equal to $35 million The firm acquires new equipment with a 3-year operatinglease that has a present value of lease payments of $12 million The most appropriate analyst treatment of this operating leasewill:

increase the debt-to-equity ratio to 0.67

leave the debt-to-equity ratio unchanged at 0.5

increase the debt-to-equity ratio to 0.57

Explanation

Shareholders' equity = $35 million / 0.5 = $70 million The most appropriate analyst adjustment for an operating lease is to addthe present value of lease payments to the firm's assets and long-term debt (leaving equity unchanged) This will result in adebt-to-equity ratio of ($35 million + $12 million) / $70 million = 0.6714

References

Question From: Session 9 > Reading 33 > LOS e

Related Material:

Key Concepts by LOS

If management is manipulating financial reporting to avoid breaching an interest coverage ratio covenant on the firm's debt, theyare most likely to:

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understating liabilities (for example by using operating leases instead of capital leases) to decrease interest expense

Understating or overstating assets would not affect the interest coverage ratio

References

Question From: Session 9 > Reading 32 > LOS h

Related Material:

Key Concepts by LOS

On a spectrum for assessing financial reporting quality, which of the following represents the highest quality?

Reporting is compliant with GAAP and decision useful but earnings are not sustainable

Reporting is not compliant with GAAP but the numbers presented reflect the company's actual

activities

Reporting is compliant with GAAP but reporting choices and estimates are biased

Explanation

A firm can have high financial reporting quality even if its earnings quality is low, such as a firm that recognizes one-time gains in

a period and identifies them clearly Biased accounting choices and non-compliance with GAAP represent lower-quality financialreporting

References

Question From: Session 9 > Reading 32 > LOS b

Related Material:

Key Concepts by LOS

The quality of a company's reported earnings is low when they:

are not sustainable

do not conform to GAAP

are lower than for the prior-year period

Explanation

The quality of a firm's earnings is considered to be low if they are not sustainable or if they are not of a sufficient level to provide

an adequate return to investors When financial reports do not conform with GAAP, the user cannot evaluate the quality ofearnings in terms of adequacy or sustainability

References

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Key Concepts by LOS

In which of the following situations is management most likely to make conservative choices and estimates that reduce thequality of financial reports?

The firm must meet accounting benchmarks to comply with debt covenants

Earnings for a period will be higher than analysts' expectations

Management's compensation is closely tied to near-term performance of the firm's stock

Explanation

Management might be motivated to "manage earnings" by making conservative choices and estimates in periods when earningsare higher than expected, delaying recognition of some of these earnings to later periods Meeting debt covenants or improvingstock performance in the near term are more likely to motivate management to make aggressive accounting choices and

estimates

References

Related Material:

Key Concepts by LOS

At the end of 2007, Decatur Corporation reported last-in, first-out (LIFO) inventory of $20 million, cost of goods sold (COGS) of

$64 million, and inventory purchases of $58 million If the LIFO reserve was $6 million at the end of 2006 and $16 million at theend of 2007, compute first-in, first-out (FIFO) inventory at the end of 2007 and FIFO COGS for the year ended 2007

FIFO Inventory FIFO COGS

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Key Concepts by LOS

Portsmouth Industries has stated that in the market for their medical imaging product, their strategy is to grow their market share

in the premium segment by leveraging their research and development capabilities to produce machines with greater resolutionfor the most challenging cases of spinal degeneration An analyst examining their financials for evidence that Portsmouth isindeed successfully pursuing this strategy would least appropriately look for:

an increase in net revenue

decreasing cost of goods sold as a percentage of net sales

an increase in average unit prices

Explanation

If Portsmouth is in fact growing their share of the premium market we would expect an increase in unit selling prices as morepremium units are sold and an increase in net revenue as sales shift from "regular" to premium machines COGS may or may notchange as percentage of sales if the strategy is successful, but a decrease in COGS would be consistent with a strategy of beingthe low-cost producer of regular machines

References

Question From: Session 9 > Reading 33 > LOS a

Related Material:

Key Concepts by LOS

With regard to a firm's financial reporting quality, an analyst should most likely interpret as a warning sign a focus by

management on an increase in the firm's:

asset turnover ratios

pro forma earnings

cash from operations

Explanation

One potential warning sign of low-quality financial reporting is management's focus on "pro forma" or non-GAAP measures ofearnings Increases in operating cash flows or asset turnover ratios are not typically viewed as warning signs of poor financial

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